UNIVERSITY OF SAN JOSE RECOLETOS

School of Business and Management

Bachelor of Science in Accountancy
Magallanes Street, 6000, Cebu City, Philippines

ETHICS CASE ANALYSIS

FOR THE

ETHICAL ISSUE UNDER OBJECTIVITY PRINCIPLE

In Partial Fulfillment of the 2nd Semester Finals

Requirements for the Course

ACCOUNTING 401

(CLASS #3130 – TTH 6:00 to 8:00 PM)

Submitted By:

GROUP C

BACUS, SHAINAH GRACE V.

CAMASURA, JET FRANCIS
CARUNGAY, BABY ALLYSIA
CLAVERIA, GENEVIEVE CELESTE
LABRADO, PRISTINE
MAGDALAGA, AIBE MARIE
PELIGRO, MA. DIANA GRACE
RODILLA, HANNAH CORRINE
TEVES, RENAH LYNN

Submitted To:
MR. MARK RUSSEL PEREZ
 ETHICAL ISSUE: OBJECTIVITY PRINCIPLE

During the year 2010, Jon Agot is a third year Accountancy student, who had an

inseparable bond with his 9 – year best friend, Jean Gray who was a Business

Administration student in the same year level. They had a close – knit relationship – as

described by their classmates – as they would do almost everything together: academic,

personal and even familial activities.

Over the years, the two companions – following their individual paths – thrived as

they invested their time and effort to achieve their goals in life. Jon, after working for one

year following his graduation and deciding to take a review for the Certified Public

Accountant Licensure Exam, passed with a grade of above 90% and was instantly

employed by a huge firm, Jelly Ace Inc. Jean, on the other hand, inherited a P60M trust

fund from his wealthy parents, which he subsequently used to establish his very own

business, Flat Tops Mini Mart.

In a span of five years, both became successful in their chosen paths and reached

the peak of their careers. They also have been recognized nationwide for their

outstanding contributions in their respective fields, with Jon become the current highest

rating state auditor employed under the Commission on Audit after quitting private

practice and Jean’s Mini Mart having around 50 branches nationwide. Jon got married

and bore three children while Jean wedded and had five of his own descendants.

However, a nationwide emergency decided to shake the economic stability. The

country was hit with the COVID – 19 pandemic and affected not just the physical, mental,

emotional and spiritual health of the citizens but as well as the financial aspect. Among

the affected are Jon and Jean.

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 Jon admitted three of his family members – including his wife – to the hospital as

they were victims of the surge. Personally, he was at full health but the worries brought

by the illness of his family took a toll on him. Fortunately, he did not have to worry about

losing his job as a government employee, leaving his occupational stability untouched.

On the other hand, Jean had his fair share of tribulation as the effects of the pandemic

extended to his 50 branches nationwide. About 20 of his branches went bankrupt,

stacking up his emotional, mental and most of all, financial burdens. Even after

experiencing a large – scale loss, he is still obliged to file for an annual tax return together

with the company’s audited financial statements to the Bureau of Internal Revenue and

another copy of its audited financial statements to the Securities and Exchange

Commission.

In the midst of Jean’s dilemmas, he remembered that his dearest friend is an

excellent professional capable of accomplishing the job. He reached out to Jon and asked

for help in auditing Jean’s financial statements as an external auditor. Jon, who gives

consideration to their friendship, instantly agrees. Having looked at Flat Tops Mini Mart’s

financial statements, Jon was able to conclude that Jean’s company is experiencing in a

downturn of its economic standing and have a high tax liability. With Jean as his lifetime

friend, Jon was ready to compromise his professional judgement. He overlooked the

accounting and auditing standards made by the company’s management and did not

properly enquire on the book of accounts and other important documents of the company.

He expressed his opinion as an auditor in accordance to Jean’s desire to attain higher

net operating losses to be claimed as deductions, thus reflecting a lower corporate

taxable income, resulting in a lower tax liability.

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 Through further examination by another external auditor as required by

governmental policies, it was later discovered that Jon did not exercise nor possess the

proper ethical conduct required from his profession due to the manipulation in auditing

Jean’s financial statements.

ANALYSIS ON THE ISSUE OF THE OBJECTIVITY PRINCIPLE IN JON’S CASE

The Objectivity principle is a concept in Accounting wherein it imposes an

obligation that professional accountants must not compromise their professional

judgement because of bias, conflict of interest or the undue influence of others. Financial

statements must be unbiased and free from any external or internal influence and must

be a trustworthy information. However, there are a lot of factors in Jon’s situation that

made him disregard his professional judgement:

Familiarity Threat

➢ Close relationship with Jean, the client (9 – year best friend)

➢ Considering the relationship between the two parties as well as the reasonably

informed party, and assessing all of the theoretical and practical circumstances of

the case, we would like to conclude that the threat would compromise the external

party's compliance with the rules.

➢ Jon becomes overly sympathetic to Jean's predicament.

Ethical Dilemmas: Objectivity and Integrity

➢ Personal relationships were not set aside.

➢ Failed to incorporate proper inquiries on the company's book of accounts and other

important documents, demonstrating the company's ineffective internal controls.

➢ No longer able to give professional skepticism.

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 ➢ Place a greater emphasis on Jean's desire for higher net operating losses to be

claimed as deductions, resulting in a lower corporate taxable income.

➢ Incompetent to practice his profession with integrity and objectivity.

RESOLUTION

Jon, an external auditor by profession, should uphold the principles because it sets

up a foundation of expected behavior in the profession. It also reflects the profession's

acknowledgement of its public interest responsibility. The principle of objectivity requires

Jon to be objective, logically consistent, and independent of unethical practices. External

parties serve multiple interests in a variety of areas and must exemplify objectivity in a lot

of circumstances, regardless of any personal relationships. Members in public practice,

specifically external parties provide attestation, tax, audit, and management consulting

services. Jon should preserve the integrity of one ‘s work, uphold objectivity, and prevent

any subservience of their judgment, regardless of service or capacity. Also, Jon should:

➢ consider disengaging from the client entirely to effectively safeguard against the

threat of familiarity as close relations with the client affected his judgment.

➢ Audit Firm - Policies & Procedures to identify relationships

o Declaration Form -> No Relationship with Client

o Whistle-blower system

➢ Independent Review of Work Done

o Done by someone who was not associated with that particular audit.

o Having a professional accountant who is not involved in providing the

service or otherwise affected by the conflict, review the work performed to

assess whether the key judgments and conclusions are appropriate.

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➢ A sound system of internal control must be put in place and maintained.

o Should be able to provide reasonable assurance that an organization's

policies, processes, tasks, behaviors, and other aspects, when taken

together, facilitate its effective and efficient operation, help to ensure the

quality of internal and external reporting, and assist in compliance with

applicable laws and regulations.

➢ Strong Policies and Procedures against conflict of interest

o Firm-Wide Safeguards

▪ Peer reviews, which are extremely effective in evaluating appropriate

reliance on external evidence in independent auditor engagements,

reduce the risk of compromising the credibility of the report.

▪ Service limitations to clients who are closely related and whose

billings are relevant to the firm could significantly decrease

considerable influence and familiarity threats.

▪ Implement corporate policies that emphasize ethical behavior and

provide avenues for discussing ethical issues without fear of

repercussions.

➢ Could disclose conflicts of interest identified and obtain consent to perform the

related professional services.

o Must disclose all potential conflicts of interest

➢ CPAs should keep their professional relationships separate from their personal

relationships during the normal course of business.

o Set aside personal relationships and comply with the standard regulations.

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 o The client's personal relationship influenced decision-making significantly.

It is regarded as a familiarity threat that could adversely affect compliance

with the standards of making judgments.

MITIGATE THREATS

To mitigate the threat of familiarity due to the relationship of Jon and Jean as 9-

year best friends, regular quality control reviews can be essential in avoiding any threats

to the auditor’s objectivity.

The following are further ways to mitigate threats of familiarity:

➢ Prior to becoming an auditor and being a chartered accountant, Jon should bear

in mind that chartered accountants are taught from the outset of their training

contracts to behave with integrity in all their professional and business

relationships and to strive for objectivity in all professional and business

judgements. These factors rank highly in the qualities that chartered accountants

must demonstrate prior to admission. They should therefore be well used to setting

personal views and inclinations aside.

➢ As an engagement partner he should have sufficient regard for his own career and

reputation to be encouraged towards objectivity and the effective use of

safeguards.

➢ As a professional auditor, Jon should set great store on his reputation for

impartiality and objectivity. It is the foundation for his ability to practice and to gain

work over the medium and long term, and he should not risk it for short term benefit

or gain.

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 ➢ It can be observed how Jon is duly influenced by his relationship with Jean, thus,

he should therefore set up alternative standing arrangements to consult externally

with another member or with the Institute's Advisory Practice Services.

➢ To the extent that Jon may find difficulty in implementing safeguards, he should

set up external consultation arrangements appropriate to their particular

circumstances. The extent of the consultation will vary according to the nature of

the problem; in some cases, it may be confined to a discussion of principles; in

others it may involve an examination of the file or a discussion of personal

relationships.

Objectivity is a mental attitude that internal auditors should maintain while

performing engagements. Jon’s circumstance is a bit complex since to be able to maintain

objectivity, internal auditors should have no personal or professional involvement with or

allegiance to the client being audited; and should maintain an unbiased and impartial

mindset in regard to all engagements, and his relationship with Jean conflicts with that

rule. Despite his situation, Jon as an internal auditor is required to not subordinate his

judgment on audit matters to others. This does not mean that as auditor he is always right

or that he knows everything there is to know about a subject. It simply means that he is

required to follow the evidence. He cannot overlook a matter just because Jean has a

situation. Objectivity would require us to see evidence and base professional judgment

on the evidence.

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 These guidelines can help Jon maintain his objectivity despite his relationship with

Jean:

➢ Establish Straightforward Guidelines

This is to develop an easily understood yet comprehensive code of conduct

that outlines work expectations for ethical behavior at work. Identify common

missteps and how to avoid them while unambiguously relating the consequences

of ethical failings. Businesses that lacked anti-fraud controls suffered greater

average losses, often twice as much from ethics violations. To prevent Jean’s long-

term losses, separating Jon’s personal relationships from the former is necessary.

➢ Assign Clear Roles and Responsibilities

Any failure to delineate exactly what each party’s responsibilities are in the

engagement can result in critical responsibilities being ignored and can lead to

negative outcomes.

➢ Establishing Accountability

Holding people accountable when establishing roles and responsibilities

should be emphasized. Establishing accountability is part of an effective project

plan for long-term success. Jon should report to executive management for

assistance in establishing direction, support, and administrative interface; and

typically to the audit committee for strategic direction, reinforcement, and

accountability.

➢ Having a Long-Term Perspective

Jean and his management obviously lack efficiency in handling and

identifying the risks that could probably arise as an effect of the unexpected surge

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of COVID 19 Pandemic that hits the globe, they lack effectiveness as well in

adapting to the consequences brought by the pandemic. Moreover, employing Jon

as an auditor in the business who did not exercise nor possess the ethical standard

required in his profession is alarming and in consequence, the business will be

affected in the long run. If Jon is truly concerned for his best friend, he should not

overlook the benefits brought by objectivity. Objectivity means that conclusions

shall be fair and unbiased, based on evidence and duly influenced by management

or personal relationships. It means that the best recommendations will be

constructed in the best interests of Jean in the long run, and not just solely for the

short-term benefit of Jean’s business.

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